Throughout my blogging and random traveling I have noticed some things that point to a retirement crisis in the US for many older Americans.

A few years back, Cash Chronicles published a few articles for Seeking Alpha. This is a great site for independent contributors and is an ingenious amalgamation of entirely user submitted financial content. There are some excellent writers and some great technical analysis on individual stocks, sectors as well as the economy. However, I started to notice a pattern in the content of the overall volume of articles as well as in the authors. I noticed that over time there seemed to be a high proportion of articles from users that were focused on high dividend yielding stocks.

There is nothing wrong with high dividend yielding stocks per se, as I highlighted in my last post When the Yield Trap isn’t a Trap. On Seeking Alpha though, I noticed that there was intense interest in the very high yielding stocks with yields of 7-16%.

In addition, and not to be ageist, I noticed that there was a small community of older writers that seemed to be intensely focused on these securities. If you spend a little time delving into the comments on many of the articles, it quickly becomes clear: this isn’t a community of people that just like risky investing or have a particular penchant for high yielding securities, these were retirees that needed a lot of income because they had not saved enough for retirement. Some of them would even admit it within their comments: all I need to do is achieve a 10% yield while retired and I will be fine.

These types of yields are almost never sustainable. Year after year though, investors and financial professionals always try to get them to work and it’s the retail investors that usually end up getting burned.

These aren’t the normal stocks that most of us have heard of. It’s a bit of a dive down the rabbit hole to smaller cap securities that are not always on the radar of big managers or CNBC and they usually fall into the following categories:

Mortgage REITs – These are Companies that buy mortgage bonds and then issue debt to leverage the portfolio and achieve high yields. They usually get crushed when rates go up.

Business Development Company – Also known as BDC’s. These were created by Congress in the early 80’s to help small firms grow. They issue shares and invest the proceeds in companies both private and public with values of less than $250 million. They invest in debt, equity and hybrid financial instruments. Their investments tend to be riskier and much of it is in private companies but they pay well. BDC’s get hurt in economic downturns as some of the small and highly leveraged companies in their portfolio fail.

Closed End Funds – These are funds that issue a fixed number of shares and then use the proceeds usually to buy a fixed income portfolio. They may leverage this portfolio with debt to achieve high yields as well. They also tend to go south when rates rise.

High Dividend Yielding Corporates – These tens to be the high yielding companies with low future growth prospects or structural issues that warrant paying investors now instead of in the future. Many of the very high yielding corporates don’t end up as good investments in the long run as the opportunities dry up along with the income.

The Bleak Reality of Retirement Savings Today

When we look at the estimated retirement savings of those in their 60’s from a study done by Transamerica, we can see why some investors may be scrounging for yield in this part of the investing world.

Source: Transamerica

Transamerica estimates that the median savings in a retirement plan for people in their 60’s in the US is about $172,000. With people living 20-30 years into retirement nowadays and social security shaky in terms of being around all those years, it’s no wonder people are turning into full time yield investors to try to stretch those savings as far as they can.

As I have pointed out in other posts though, they are likely setting themselves up not only for failure but speeding up the actual date when they may run out of money. Mellon Capital did a study a few years ago analyzing the realized dividend yield versus the forecast dividend yield for stocks in the S&P 500 and found that what investors ended up actually getting in these cases may have been far from what they expected.

Source: CNBC

Interestingly, it seems the sweet spot may be around 6-7% yield but it may be safe to say that if you want to focus on the high dividend stocks, save yourself the heartache and just invest in a high dividend yield index fund.

Not having enough savings also shifts the composition and makeup of the workforce as well. Many older people now say they will continue to work into their 60’s to supplement their income and save more. It’s a trend that is contributing to the growing trend of workers who are past retirement age yet still working.

An Alternative

Which bring me back to Nicaragua. One aspect of my trip to Nicaragua earlier in the year that I may not have posted about was the amount of US retirees who had taken up permanent residence in some of the Pacific coast resort towns.

Source: author

When political violence flared up there in 2018, those foreigners who could, fled. Despite the general exodus, I did see a large contingent of Americans and Canadians that instead chose to stay and tough it out.

Seeing as how you can easily live for $500-$1000 a month in Nicaragua it looks like these people have decided that they would rather spend their days stretching their dollar overseas rather than work into their 70’s.

As was the case when the violence flared up though, cheap emerging economies may be great for a few months out of the year or even a few years before heading back, but when political instability strikes, tough choices will have to be made.

Since locals in Nicaragua had told me that the tourism industry imploded after the violence, it must have been a scary and maybe even a little helpless decision to stay despite the protests raging across the country.

The weather is tough to beat and the people are friendly there. Social Security goes a lot further in Nicaragua than it does in say, New York City. Needless to say, moving to an emerging country is one way that people deal with the lack of savings and the retirement dilemma in the US.

Conclusion

With the latest presidential debates discussing inequality and greater taxes, it may be worthy of having a discussion about poor planning and retirement. The days of the company taking care of you forever through your pension is gone. More instability, job changing and career breaks have become the norm. In addition, personal accountability and knowledge will be required going forward for more people to be able to retire comfortably. So far it seems many have failed at the planning part and have to compensate with unrealistic return expectations on their assets. It’s likely that neither Seeking Alpha, BDC’s or mortgage REITs will be able to cover the gap, or save you.

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